Compensation (Compa) Ratio – Definition, Formula & How to Calculate

  Human Resources

The formula commonly used by compensation professionals to assess the competitiveness of an employee’s pay level involves calculating a compa-ratio also sometimes referred to as “compensation” or “comparison” ratios. Compa-ratio is the short form for Comparative ratio.

How Compa-Ratio is Calculated?

Compa-ratio is calculated as the employee’s current salary divided by the current market rate as defined by the company’s competitive pay policy. It’s a very simple formula, and a powerful one when it comes to deciding how large of a raise in pay an employee needs at a given time. Compa-Ratios are position specific. Each position has a salary range that includes a minimum, a midpoint, and a maximum. 

These three values represent industry averages for the position. A Compa-Ratio of 1.00 or 100% means that the employee is paid exactly what the industry average pays and is at the midpoint for the salary range, A ratio of 0.75 means that the employee is paid 25% below the industry average and is at the risk of seeking employment with competitors at a higher pay that is perceived equitable. A ratio of 1.15 compa-ratio would mean the employee is paid above the industry average.

Individual compa-ratio

The individual compa-ratio, which describes the individual’s position in the pay range against the pay policy reference point for the range and can be used to reposition an individual’s pay in the range if it is too high or low.

Group Compa-ratio

The group compa-ratio, which quantifies the relationship between practice and policy for the whole organization or a defined population group (function, department, occupation or job family). It is a calculation of the sum of actual pay as a percentage of the sum of job reference point rates. This ratio has an important part to play in the overall pay management process. It can be used to establish how pay policy has been implemented overall and identify differences between parts of the organization which may indicate problems in the policy itself or in the way it has been implemented by managers. It can also be used to plan and control pay budgets.

Average Compa-ratio

The average compa-ratio, which is the sum of each individual’s compa-ratio divided by the number of individuals. It is therefore not the same as a group compa-ratio which is based on the relationship between the sums of actual rates of pay and the sums of job reference points of pay. The average compa-ratio can therefore differ from the group compa-ratio according to the spread of individual compa-ratios at different job sizes. The group ratio is more frequently used.

What is a good Compa-ratio? 

Compa-Ratio is a relative measure of your current ability to reach your policy structure line.  These are organizationally-unique variables involved to calculate Compa-ratio

  • Grade width
  • Job progression protocols
  • Population maturity
  • Market ratio policy
  • Accuracy of your grade assignments
  • Precision of your grade midpoints
  • Performance of your employees
  • Timing and frequency of increases
  • Desired competitive posture
  • The statistical distribution of individual C/Rs
Summary
Compensation (Compa) Ratio - Definition, Formula & How to Calculate
Article Name
Compensation (Compa) Ratio - Definition, Formula & How to Calculate
Description
The formula commonly used by compensation professionals to assess the competitiveness of an employee’s pay level involves calculating a compa-ratio also sometimes referred to as “compensation” or “comparison” ratios. Compa-ratio is the short form for Comparative ratio.
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Plianced Inc.
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